Commentary: Income Inequality in America Is an Engineered Myth

by J. Peder Zane


The federal government significantly and intentionally misreports income distribution, sparking bad policies and political divisions.

That’s the argument former senator Phil Gramm and two other economists, Robert Ekelund and John Early, lay out in their compelling and essential new book, “The Myth of American Inequality: How Government Biases Policy Debate.”

Using 2017 figures as their reference, their sprawling and statistics-heavy work (blessedly) rests on one key observation: While the U.S. Census Bureau reports that the average income of the top 20 percent of American households that year was 16.7 times greater than the average income of the bottom 20 percent of households, the real number, they argue, is 4.1 times. This massive discrepancy is explained by a straightforward accounting trick: The Bureau didn’t count two-thirds of the $2.8 trillion in transfer payments given mostly to the poor and working class or the $4.4 trillion taken  through federal, state, and local taxes, “82 percent of which are paid by the top 40 percent of household earners.”

The net result, they report, “is that, in total, the Census Bureau chooses not to count the impact of more than 40 percent of all income, which is gained in transfer payments or lost in taxes.”

The authors note that this misinformation can be traced to decisions made in the 1940s when the agency “established a procedure for measuring income by only counting ‘cash’ payments – currency, check, or direct deposit to a recipient’s bank account – as income.” But this yardstick became obsolete with Lyndon Johnson’s War on Poverty during the 1960s which created “an explosion of new programs, such as Medicare, Medicaid, food stamps, housing subsidies, and numerous others that have not been classified as cash payments.”

There are, the authors report, “at least one hundred federal programs that each spend more than $100 million annually providing transfer payments to households, as well as an uncounted number of smaller programs” – transferring some $2.8 trillion a year. “By 2017,” they write, “transfer payments were a whopping 18.2 percent of all personal income but Census counted only one-third of those transfers [$0.9 trillion] as income to the households that received them.”

One might argue that Medicaid or housing subsidies, for example, are not really income, except that health insurance and shelter are two major items Americans spend their money on. What is income, after all, except a means to purchase the things one needs?

A chart prepared by the authors shows how dependent many Americans are on government subsidies. “The average household in the bottom quintile [lowest 20 percent of income] received an astonishing $45,389 in government transfer payments annually, more than nine times greater than its earned income. The second quintile received a total of $29,793 in government transfer payments, about two-thirds as much as the bottom quintile, and the middle quintile received $17,850.”

Thanks to this vast transfer of income (and the accumulation of federal debt), the actual poverty rate for children is not the Census Bureau’s 2017 figure of 17.5 percent but 3.1 percent. For Americans 65 and over, they add, the proportion in poverty falls from 9.2 percent to 1.1 percent. The upshot? “Social Security, Medicare, Supplemental Security Income, food stamps, and other transfer payments have virtually eliminated poverty among seniors.”

One might expect progressives to celebrate this great victory in their war on poverty. Instead, they like to complain that all the spending they’ve championed has had little effect – apparently because pushing that narrative allows them to push for even more transfer payments. The fact that the Census Bureau enables this legerdemain through misleading measures appears to be troubling proof of the government’s ideological bias.

Facts and truth always matter, but there is a deeper problem with statistical chicanery, the authors assert. Putting aside that transfer payments are a main driver of our dangerous national debt, government money also appears to be discouraging many Americans from working. Adjusting for household size – those in the bottom 20 percent of income live in smaller households than those in second quintile, and so forth – “the blockbuster finding is that on a per capita basis the average bottom-quintile household receives over 10 percent more [income] than the average second quintile household and even 3 percent more than the average middle income households.”

As many benefits are tied to earned income, unemployment is a better option. “The most significant factor in growth of earned-income inequality [not counting transfer payments] in the last 50 years has been the sharp drop in the proportion of prime work-age persons who worked in the bottom two quintiles,” the authors note. “In 1967, 68 percent of prime work-age adults in the bottom quintile had jobs, but by 2017 that percentage had dropped by almost half to 36 percent. The percentage working in the second quintile declined from 90 percent to 85 percent. At the same time, the proportion of prime work-age persons working in the top three quintiles of households increased by 7 percent, largely from an increase in the employment of women.”

“The Myth of American Inequality” provides far more detail about these trends – including the impact of education, the decline in manufacturing jobs, the rise of two-income households and the role of the billionaire class. Recognizing that numbers are just tools used to inform policy judgments that involve a range of unquantifiable values and concerns, the authors note that they intend their book to start rather than end a more rigorous debate about inequality and transfer payments.

In a sign of the times, their book, which was published in September, has been ignored by the New York Times, the Washington Post, NPR, CNN and most every other liberal news outlet. Facts may be stubborn things, but ideology may prove to be even more intractable.

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J. Peder Zane is a RealClearInvestigations editor and columnist. He previously worked as a book review editor and book columnist for the News & Observer (Raleigh), where his writing won several national honors. Zane has also worked at the New York Times and taught writing at Duke University and Saint Augustine’s University.
Photo “Female Process Engineering Technician” by This is Engineering. CC BY-NC-ND 2.0.



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